Dollar Illiquidity and Central Bank Swap Arrangements During the Global Financial Crisis

Andrew Rose and Mark Spiegel

No 8557, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: While the global financial crisis was centered in the United States, it led to a surprising appreciation in the dollar, suggesting global dollar illiquidity. In response, the Federal Reserve partnered with other central banks to inject dollars into the international financial system. Empirical studies of the success of these efforts have yielded mixed results, in part because their timing is likely to be endogenous. In this paper, we examine the cross-sectional impact of these interventions. Theory consistent with dollar appreciation in the crisis suggests that their impact should be greater for countries that have greater exposure to the United States through trade and financial channels, less transparent holdings of dollar assets, and greater illiquidity difficulties. We examine these predictions for observed cross-sectional changes in CDS spreads, using a new proxy for innovations in perceived changes in sovereign risk based upon Google-search data. We find robust evidence that auctions of dollar assets by foreign central banks disproportionately benefited countries that were more exposed to the United States through either trade linkages or asset exposure. We obtain weaker results for differences in asset transparency or illiquidity. However, several of the important announcements concerning the international swap programs disproportionately benefited countries exhibiting greater asset opaqueness.

Keywords: Dollar; exchange rate; Federal Reserve; Financial crisis; Illiquidity; Swap; Taf (search for similar items in EconPapers)
JEL-codes: E44 E58 F31 F33 F41 F42 G15 O24 (search for similar items in EconPapers)
Date: 2011-09
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mac, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Dollar illiquidity and central bank swap arrangements during the global financial crisis (2012)
Chapter: Dollar Illiquidity and Central Bank Swap Arrangements during the Global Financial Crisis (2011)
Working Paper: Dollar illiquidity and central bank swap arrangements during the global financial crisis (2011)
Working Paper: Dollar Illiquidity and Central Bank Swap Arrangements During the Global Financial Crisis (2011)
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